MICRO CAPTIVES

What is Artex?

Micro Captive Services Captive Management

Bermuda, Cayman, Vermont, D.C., Hawaiiand more

Analytic Services
Actuarial, Claims, Loss Control, Risk Management, Underwriting

Specialty Wholesale Broking

Bermuda Market, Public Entity, Scholastic

PEO Solutions

Rent-a-Captive Programs

Business Process Outsourcing

Artex Statistics

Over $1 Billion in Premium 200+ Specialist Staff 10 Locations Over 1,000 Entities Insured in Our Programs 400+ Captives Managed

Captive Insurance The Middle Market Solution

WHAT IS A CAPTIVE? A captive is an insurance company that insures the risks of its owner, affiliates, or a group of companies. It issues policies, collects premiums, and pays claims.

Where do your premium dollars go?

90% of S&P 500 Companies and Other Large Entities Use Captives
Examples of Corporate Captives
Parent Exxon-Mobil Archer Daniels Midland Verizon AT&T University of Michigan Phillips Petroleum Starwood Hotels Johnson & Johnson CBS Corporation National Telephone Coop Association Catholic Church Dioceses Captive Ancon Insurance Company Agrinational Insurance Company Exchange Indemnity Company Gateway Rivers Insurance Company Veritas Insurance Corporation Sooner Insurance Company Westel Insurance Company Middlesex Assurance Company Central Fidelity Insurance Company National Telcom Corporation National Catholic Risk Retention Group, Inc.
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The Purposes in Forming a Captive Include:

Types of Captives
Group /Association Captives owned & operated by a group of members; 100% of risk and assets pooled Sponsored or Rent-a-Cell Captives owned & operated by a sponsoring entity; liabilities and assets legally segregated Single Parent Captives insures the risk of the owner and it subsidiaries, traditionally used by large Fortune 2000 companies Micro-Captive is a single parent captive that has special tax benefits, focused on small to mid-size businesses
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IRC 831(b) Micro-Captive Middle Market Solution

$1.2M annual premium Taxed only on investment income (C corp rates)

IRC 831(b)
If net written premium < $1.2M, taxed on investment income Year-by-year premium test Must qualify as insurance company
831(b) test not met for this year

Premium Payments

$1,200,000

Year 1

Year 2

Year 3

Year 4

Year 5

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Who is an Ideal Candidate?

Good candidates generally meet one or more of the following criteria*:
$10M+ gross revenue Pre-tax profits of at least $1MM Stable cash flow Substantial self-insured / uninsured business risk
*Smaller businesses with at least $3M revenue can work for some captive programs.

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Who is a Candidate?
Business with Substantial Risk
May be insured or self-insured

Key Industries:
Real Estate Developers / Builders Manufacturers Professional Services Firms Franchisees Restaurant / Hotel Chains Physicians / Groups

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Captive Strategy: Transfer Uninsured Risk to Workers Comp Property Captive Hidden Risks
Auto General Liability

Insured Risk

Uninsured Risk
Deductibles
Exclusions Operating Risks A/R Concentration Construction Defect Credit Default Disability Administrative Actions D&O/E&O Litigation Defense Mold and Pollution Product Warranty
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Traditional Captive Micro Captive Does not replace current commercially placed property and casualty program like a traditional captive.

Insured Risk
Workers Comp Property Auto General Liability

Uninsured Risk
Deductibles
Exclusions Operating Risks A/R Concentration Construction Defect Credit Default Disability Administrative Actions D&O/E&O Litigation Defense Mold and Pollution Product Warranty
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Ownership Options

Shareholders

Key Employees

Family

Estate Plan Trust

Captive Captive

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Estate Planning With a Captive

Mom / Dad

Mom / Dad 1%

Child Trust 99%

LLC

Business

1.2 M P&C Premiums

Captive

Investments

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Micro-Captive Benefits
Pre-tax wealth accumulation Favorable tax treatment Convert self-insured risk into P&C premium Risk management Minimize P&C insurance costs Asset protection Estate planning / wealth transfer
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Tax Law and Captive Insurance

What Constitutes Insurance for Tax Purposes? Risk Shifting, Premium Priced Fairly Risk Distribution, Law of Large Numbers

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How Do We Price the Premiums?

Risk Shifting Achieved By: ISO Rates (www.iso.com) Underwriters Actuaries Market quotes from independent carriers

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Safe Harbor Rulings

Risk Distribution Met Via Two Options: Rev. Rul. 2002-89 Rev. Rul. 2002-90

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OPTION 1: Safe Harbor Revenue Ruling 2002-90

12 Brother / Sister subsidiaries No single Brother / Sister subsidiary can constitute greater than 15% or no less than 5% of the risk
Business / Parent

Sub Sub Sub Sub

Sub Sub Sub Sub

Sub Sub Sub Sub

Each Sub Comprises 5-15% of Risk

Captive

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OPTION 2: Safe Harbor Revenue Ruling 2002-89

More than 50% of risk exposure from unrelated parties

Business

49% of Risk

Captive Unrelated Parties

51% of Risk

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IRS Compliant Captive - Pooling (Rev Rule 2002-89)

Low $ / high frequency claims (paid by captive) 49% of risk / premium Low frequency / high $ claims (paid by risk pool) 51% of risk / premium

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Artex Pool Details

190 Pool Participants (January 2013) $81,227,637 in total pool premium No policy limits in excess of $1,000,000 The frequency layer of risk (the first 25% of all claims) is retained by either the captive or the insured
Example: On a $1,000,000 claim in the pool (the max. policy limit), the first $250,000 will be paid by the insured business, or that business captive

Participant share of pool varies from 0.02% to 0.799%

Example: Assume the max loss for single claim covered by pool ($750,000) Loss paid by lowest percentage captive participant = $149 (0.02% x $750,000) Loss paid by highest percentage captive participant = $5,994 (0.799% x $750,000)

All policies in the pool must meet strict UW guidelines established by Artex Risk Solutions, Inc.
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Top Pool Participants by Industry

MEDICAL SERVICES 24%l

MANUFACTURING 17%

CONSTRUCTION 9%

FOOD & BEVERAGE 5%l

TRANSPORTATION 4%l

FARMING/LIVESTOCK 4%l

TECHNOLOGY 4%l

CONSUMER PRODUCTS & SERVICES 4%l

OTHER INDUSTRIES 29%l

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Pool Participants by Region

(Out of 190 Pool Participants)

33% WEST 20% - SOUTHWEST 19% MIDWEST 17% SOUTHEAST 11% NORTHEAST

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Top 15 Policy Types in Pool

ADMINISTRATIVE ACTIONS BUSINESS OVERHEAD COLLECTIONS BUSINESS INTERRUPTION DIC CRISIS MANAGEMENT GENERAL LIABILITY DIC INTELLECTUAL PROPERTY KEY CONTRACT KEY CUSTOMER KEY EMPLOYEE KEY SUPPLIER LEGAL EXPENSES PRODUCT/SERVICE REWORK PROFESSIONAL LIABILITY DIC REGULATORY CHANGES *38 other policy types in pool

The 15 policy types listed represent 85% of the total pool premium
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Uses of Captive Assets

Captive Owner
Dividends Salary Liquidation

Operating Company

Pay losses

Reinsurance

Captive

Other Insurance Company

Invest Assets

Stocks

Bonds

Other

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Life Insurance Funding Options

Straight ILIT LLC Premium Financing
Captive
Collateral Agreement

Captive

Captive Loan

Captive

Life Insurance

ILIT

LLC

ILIT Loan

Life Insurance

Life Insurance

Life Insurance

Bank

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Micro Captive Pro Forma

CAPTIVE Revenue Claims Admin fees Investment Income Total Underwriting Income Income Tax (Assumes 48.4% Tax Rate, Includes 5% State) Net Revenue Capital Gains Tax After Tax Revenue Estate Tax
(if applicable -- 40% Rate) (23.8% Rate)

NO CAPTIVE $1,200,000 ($100,000) $0 $25,000 $1,125,000 ($544,500) $580,500 $0 $580,500 ($232,200) $348,300

$1,200,000 ($100,000) ($80,000) $20,000 $1,040,000 ($9,680) $1,030,320 ($245,216) $785,104 $0 $785,104

Net revenue after Income and Estate Tax

Captive Tax Savings

$436,804
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Captive Formation
Artex will handle all aspects of forming the captive:
Initial analysis and feasibility study Domicile selection and applications, including business plan and pro forma financial preparation Design and implementation of captive ownership structure Coordinate initial capitalization, including brokerage accounts Maintenance of proper corporate records Underwrite and draft insurance policies Prepare and obtain approval for regulatory filings Payment of regulatory fees Corporate formation; payment of formation fees
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Turn-Key Captive Management

Captive Manager assigned as contact point for all issues Annually underwrite and draft insurance policies Prepare regulatory filings for your review and approval Ongoing work with domiciles Supervisor of Insurance, the IRS, and other regulatory authorities Accounting: Prepare quarterly financial statements, bank reconciliation, document and monitor account activity Solvency margin analysis and loss reserve analysis Prepare tax return for Captive

Arrange for unrelated insurance Arrange reinsurance as necessary Monitor ongoing regulatory changes Consult with Captive owners regarding proper investment structuring Maintenance of corporate records Arrange and coordinate an independent audit if required by the domicile Pay all regulatory and audit fees Loss handling/claims processing Captive liquidation and winding up activities

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Whats Next?
Contact Artex to review specific potential opportunities Feasibility Study: 3-4 weeks Captive Formation: 2-4 months
IRS Circular 230 Notice: To the extent that this document concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

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R. Brian Flinchum
Division Assistant Vice President, Artex Risk Solutions, Inc.
Mr. Flinchum is with Artexs Single Parent Captive Management Division and focuses primarily on small to mid-size businesses, which make the IRC 831(b) election. At Artex, Brian provides service and subject matter expertise to Artexs clients and their professional advisors. He supports Artexs both business development and operations. Brian brings over a decade of experience as a captive manager and sales professional in the alternative insurance industry and has formed over 200 captives. Prior to joining Artex, Brian headed the captive sales effort at Wilmington Trust where he was responsible for introducing clients to a full array of captive management service capabilities, including program design and implementation, guidance through the license application process, and operation of the company. Earlier in his career, Brian served as an Account Executive for AIG Insurance Management Services (AIMS). At AIMS, he oversaw the accounting, auditing, regulatory filings and actuary reporting requirements, as well as, coordinated the annual board meeting for several pure parent captives, risk retention groups, and sponsored cell companies for large Fortune 500 Companies. Additionally, he developed proformas, forecasts and feasibility studies for most of AIGs onshore captive formations. He has experience with numerous types of captives and alternative risk structures and has assisted clients in the banking, construction, entertainment, manufacturing, medical, real estate and transportation industries. His captive domicile experience includes Anguilla, Arizona, Bermuda, Cayman Islands, Delaware, Hawaii, Ireland, Nevada, Nevis, South Carolina, Turks & Caicos, Utah, Vermont and Washington D.C.
CONTACT INFORMATION:
Artex Risk Solutions, Inc. 123 Bayonet Point Brunswick, GA 31523 Office | 912.342.7163 Cell | 912.506.9727 Brian_Flinchum@artexrisk.com

EXPERTISE IN:
Design, formation, and

management of captive insurance companies

Captive domicile selection Regulatory requirements for

captive insurance companies

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Howard H. Potter
Managing Director, ST Consulting, LLC
Howard Hugh Potter, JD, MBA, CPA, has been involved in providing insurance, tax, and financial strategies for public and closely held businesses utilizing captive insurances companies for the past nine years. He focuses on business development and subject expertise with CPA & law firms, insurance agencies, and financial planning & wealth management firms through an alliance with Artex Risk Solutions, Inc. and Tribeca Wealth Advisors LLC, subsidiaries of Arthur J. Gallagher & Co. Mr. Potter received his Juris Doctorate and Bachelor of Science of Business Administration from Creighton University and his Masters of Business Administration from the University of Nebraska. Mr. Potter was staff accountant at Peat, Marwick and Mitchell in Omaha, Nebraska and Senior Accountant in the Tax Department at Touche Ross Company in Denver, Colorado. As partner in the law firm of Vaughan and Potter, he worked in the areas of tax, legal, and financial consulting involving oil and gas investments, equipment leasing, and the marketing of tax advantaged investments. He was co-founder, principal, and national sales manager of Denver Securities Corporation, a NASD securities firm and was responsible for developing a national sales team, sales material and presentations that marketed through law firms, CPAs and the brokers/dealer community. After retiring from the law firm he served as President and CEO of CareerLab, Inc. a human capital management firm and a member of Lincolnshire International with 17 offices in North America. Mr. Potter also served on the Board of Lincolnshire and as Treasurer. Mr. Potter is an inactive member of the American Bar Association, Colorado Bar Association, Nebraska Bar Association, Colorado Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He holds current licenses with the Colorado Division of Insurance for property & causality and life. Mr. Potter is a former member of the Union League Club of New York and served as a Member of the Board of Trustee for Colorado Academy, Denver, Colorado. He is a lifetime member of the National Rifle Association. Mr. Potter currently serves on two Boards: the Colorado Board of Directors of the Association for Corporate Growth and the Colorado Board of Directors of the Financial Executives International. He was awarded the Denver Association for Corporate Growth Chapters 2010 Outstanding Member of the Year Award. Mr. Potter grew up on a cattle and horse ranch on the Rosebud Sioux Indian Reservation in South Dakota and is a 4th generation enrolled member of the Rosebud Sioux Tribe. His children, Kristin, Kara and Brandon are also enrolled members of the Rosebud Sioux Tribe as are his three grandchildren, Kendall, Ben, and Russell. He and his wife, Marcia, enjoy visiting their children and grandchildren in Aspen, CO and Santa Fe, NM. Their mutual passions are family, music, and the outdoors.

CONTACT INFORMATION:
ST Consulting, LLC 8725 East Radcliff Avenue Denver, CO 80237 Cell | 720.308.8246 hhp@hhpdenver.com

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